JTC’s managing director, Luxembourg Joost Mees reflects on the jurisdiction’s resilience, how the pandemic could see long-term changes to the way private equity funds operate and sustainable investing in a post-lockdown world.

How have Luxembourg fund service providers reacted to Covid-19 disruption? Have they been able to maintain service levels and business continuity?

Luxembourg fund service providers have moved swiftly in converting their regular business continuity plans to make sure they could provide the same level of services whilst respecting the necessary measures taken by the government, especially related to remote-working. Apart from making sure services were continuously delivered, focus has been on re-evaluating the risk management framework to address the new and enhanced risks that Covid-19 is creating.

A change from physical, in person meetings to telephone and video conferencing has enabled service providers to keep close to their clients and other stakeholders. It was interesting to see the kind of creativity shown on the business development side, where virtual social events, like wine tastings and similar events were organised on a regular basis. Size does matter in these uncertain times, and larger, global organisations might be better equipped, based on their investment in software solutions, than smaller firms, and we have been lucky and prepared in that respect.

How have new fund activity levels compared year-on-year to 2019? How has the drop in overall private equity deal and fundraising activity affected Luxembourg’s private equity community?

We have seen significant interest in new projects in the alternative investment sphere throughout 2020 for Luxembourg investment vehicles, almost to the level of 2019, however the period between set-up of the vehicle and first closing has increased significantly in this environment. The volatility in the market provides for uncertainties at the level of managers and therefore, we see an obvious difference in lead times for various funds.

I believe the impact on private equity funds especially, might actually be twofold; on the one hand, it has proven to be hard for funds to value their assets due to the pandemic and thus delaying potential assets, predominantly in the space of retail investments. Whereas, there is a lot of dry powder, so a lot of funds are eager to invest, but given the difficulties in valuing assets, one wonders whether the moment is right.

Deal activity has been low in Q2 & Q3, but will hopefully recover in Q4 and Q1 of 2021 as there will be more visibility on the financial impact at the level of portfolio entities.

What support for the funds industry has the Luxembourg government and regulator been able to provide?

From the start of the Covid-19 crisis, the Luxembourg regulator, CSSF, has made every effort to ensure the operational continuity of the Luxembourg fund industry, encouraging remote-working as one of the early adopters in Europe. For example, the Grand-Ducal regulation (20 March 2020) provided several measures to facilitate board and shareholder meetings, and in particular, the possibility to hold the meetings without a physical presence, for all Luxembourg companies and other entities.

The regulator’s efforts in combination with the Grand-Ducal regulation have provided essential regulatory support to all service providers in offering the most seamless experience for their clients and stakeholders as possible. The aforementioned regulation has just been extended until the end of the year and the CSSF is developing a circular that will lay out a set of remote-working recommendations for Luxembourg financial outfits. 

Will Covid-19 drive any longterm changes to how the funds industry works more generally?

The virus will force new ways of working in the fund industry. On the fundraising side, roadshows have for some time been the preferred means of courting new investors. However, travel and in person meeting restrictions imposed due to the Covid-19 pandemic have stopped this approach in its tracks, so the managers have to adapt their strategy to convert roadshows into a virtual roadshow, which might have to look very different to the traditional one.

One interesting conundrum will be how technology will keep virtual client events engaging and interesting. As the remote-working environment drags on, one should be conscious that it might become increasingly difficult to retain investors’ attention via digital meetings.

For service providers, remoteworking, in some form, is here to stay and the industry needs to respond by digitalising even swifter than envisaged and making sure their IT security is more robust than ever.

Is there a particular investment trend that you see growing in Luxembourg, post Covid-19?

As I think we are seeing in other jurisdictions, there is a clear trend developing for green, sustainable and responsible investments – while this may have been exacerbated by the global conscience-shock of a pandemic, it was a trend that was already in the making pre-Covid. Luxembourg ranks as the second greenest financial centre in the world after Amsterdam, and lists more than half of the world’s green bonds.

At present, Luxembourg funds currently represent 31% of all European responsible investment funds, and the jurisdiction is a global leader in ‘inclusive finance’ with a 61% market share of global assets under management in microfinance investment vehicles – according to Luxembourg for Finance 2020.

Luxembourg is making a real effort to support this trend. The Luxembourg Ministry of Finance announced on 2 September 2020 that it had become the first European country to adopt a reference framework for sustainable bonds (the Sustainability Bond Framework).